On the Road: SiteOne Landscape Supply

It is an understatement to say the pandemic disrupted our professional routines. This disruption led to some research process enhancements, such as near-frictionless video conferencing. Management teams are generally more accessible now thanks to Zoom or Teams, and we can easily schedule 30-minute “catch-up” calls.

However, the pandemic made it impossible to jump on a plane and spend a day with management at their headquarters, a manufacturing facility, or a research and development centre. At Pembroke, we have learned over our 54-year history that it is those “On the Road” experiences that deepen our knowledge, build our conviction, and contribute to long-term value creation for our clients.

We were excited to spend many days “On the Road” this quarter, visiting current and potential portfolio companies. One noteworthy visit was to Roswell, Georgia, to see the team at SiteOne Landscape Supply (“SITE”).

SITE is the largest, and only national distributor of landscape supply products (think irrigation, fertilizer, hardscapes, lighting and nursery products—over 135,000 SKUs in total). SITE controls approximately 15% of a more than $20 billion market and is five-times larger than its next largest competitor.

We first invested in SITE when it was priced at around $50 in July of 2017, and the thesis is as compelling now as it was then. It has sustainably grown in the double digits, returns more than 25 cents for every dollar of equity capital invested, and benefits from both a compelling moat (scale, brands, market presence and operational systems, just to name a few) and an advantageous market structure (in the power seat between thousands of suppliers and hundreds of thousands of customers).

Steering the ship is a team that has done it before, is well aligned with investors and thinks about growing the business for the long-term, with a profound respect for capital.

The team and their philosophy are critical given SITE’s consolidation opportunity. They have acquired over fifty companies since going public and typically acquire 7 to 10% of their revenue base per year. Importantly, they are a self-funding acquisition machine: they use internal cash flow to finance their acquisitions, as opposed to issuing debt or equity. Going forward, the company should benefit from a multi-decade run as the acquirer of choice in landscape distribution.

Despite this high-quality investment thesis, SITE’s stock has struggled this year, posting a roughly 50% decline. Like many premium-priced growth stocks, SITE has suffered from valuation compression due to the rising interest rate environment. Its proximity to the residential housing market has not helped. While only a minority percentage of the business (about a third) is exposed to new residential construction, the stock market has uniformly punished stocks with any such exposure.

The company also benefited from the inflationary environment and its large market presence by stocking inventory in advance of price increases, selling at market rates, and then earning outsized profits that could partially reverse when inflation turns.

While these macro factors may eventually impact earnings in the near-term, we believe nothing has changed with either the multi-year investment opportunity or SITE’s underlying business quality. It is the same team, executing on the same plan, strengthening the same business each year. The only thing that has structurally changed is the valuation, which we believe now represents an excellent risk/reward proposition.

Our conviction was only strengthened by our recent trip to Georgia. In addition to meeting with senior management, we also toured SITE’s single largest customer facility. We furthered our appreciation for their operational competency, customer value proposition, scale benefits, management depth, and additional leverage potential in their financial model.

While a 30-minute Zoom session can answer certain questions, it is no substitute for sitting across a table, touring a facility, meeting multiple layers of management, and truly understanding a business. We have missed these interactions during the pandemic, but are thrilled to be back “On the Road”.